Ep. 26 | Private Reinsurance Program / 831(b)
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Speaker 2:Hey, everybody. Welcome back to Teaching Tax Flow, the podcast, episode 26, private reinsurance program, also known as FAPE 31 b. Something to think about as we dive into this, have you ever tried if you're a business owner to ensure one of your risks and really gotten the, stern, no, we cannot do that? If you have, this is the episode for you. But before we dive into it, as always, let's take a second to hear a sponsor.
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Speaker 3:You can look in our show notes or email us at hello@teachingtaxflow.com.
Speaker 2:Welcome already back to the Teaching Tax Flow podcast. I'm one of the hosts here, John Tripalski, from the Teaching Tax Flow team. To To my right as always, Chris Pacquero.
Speaker 4:How's it going, Chris? Hey. Well, good to be back with you.
Speaker 2:I would say it's been a long time, but it's only been a week. So, hopefully, you guys didn't miss us too much. We are in 26. So episode 26. We've been doing this for twenty six weeks.
Speaker 2:It's kinda hard to believe.
Speaker 4:The year. It's wild. What's good at math? Wild is
Speaker 2:so today's topic is one that I'm really interested in. And to be totally honest, it's one that I don't know a whole lot about. So I'm super intrigued with it, super excited for the conversation. The topic, if I don't mess this one up because, you know, I'm bad with numbers sometimes, ironically enough. It is the private reinsurance program, also known as our friend, eight thirty one b, and Roger Roundy is joining us today.
Speaker 4:So excited to announce Roger Roundy, strategic advisor group. Roger and I work together quite a bit in my private CTA practice, helping many taxpayers, that are what we call the teaching tax flow community, red diagnosis, meaning high marginal tax rate, with this private reinsurance company program. So, Roger, thank you for joining us. Well, it's great to be here. Excited to excited to have
Speaker 2:a conversation. Absolutely. Absolutely. So so I think a good place to start off with this is for those that don't know exactly what an eight thirty one b is, walk us through just very, very high level 30,000 foot view on on what that is exactly.
Speaker 4:Sure. You bet. So eight thirty one b is not a new thing. Right? It's been around since 1986.
Speaker 4:It was introduced into the into the code as part of the tax reform act and what it says is, hey, mister business owner, you have a lot of risk. Some of those risks, you can buy insurance to protect your business, and some of those risks, you just don't have insurance options. For example, I have a reputation in a brand. Well, I can't go down the street to State Farm or Allstate and say, hey, I want a reputation insurance policy. Doesn't exist.
Speaker 4:But do I have reputation risk? Absolutely. So so does teaching tax law has a reputation risk. So what what the code says what what congress says, okay. Look.
Speaker 4:We're gonna allow you to protect this risk yourself by creating your own private insurance company. That's the eight thirty one b of the code says you can create your own private reinsurance company, and the first two and a half million dollars that you take from your insurance from your operating company and put it into your insurance company is going to be tax deductible. So anything changing on your tax return is your line item for insurance, for business insurance, as you guys all know, is a one sixty two tax deduction. So your line item for business insurance gets larger because you're purchasing new insurance policies to protect risk that you can't otherwise buy insurance to protect. And so when we talk in our teaching tax flow world, red diagnosis, high marginal tax rate, everyone can understand that, and the, private reinsurance program fits so well into our income shifting to a related business.
Speaker 4:So if you have it's like I mean, having John on this podcast is a big risk for teaching tax flow brand every week. So I but if if you are under insured or have uninsurable, interests in in in your profitable business, this program might make sense for you. So, Roger, could you give us maybe two or three bullet points on what type of business as far as what their typical tax burden is and, what what avatar does this really work well with? Well, and, ultimately, that's a that's a great question because, really, any tax code can be used. It can be overused, and you can flat out abused.
Speaker 4:And my job as an insurance manager is to make sure that if you're going to do an eight thirty one b, it's done appropriately and within the attempt of the code. So what we're looking for business owners, successful business owners, obviously, they're for profit and profitable. Right? And the risk, you know, just to hit back on the insurance piece of it all, the insurance policies themselves, that's an easy piece. We all have risks that we don't have insurance to protect ourselves.
Speaker 4:So we'll we'll underwrite each business. So, really, there isn't a specific risk or a type of business that makes sense. If you are a successful business owner, you have risk that we're gonna help you protect. But, really, the parameters of what makes a potential or or those who typically use an eight thirty one b are business owners who are grossing or projecting to gross over a million dollars in the following twelve months. They have a high tax liability, probably north of paying, used to paying more than 50 or so thousand dollars a year in taxes, and they have typical risks.
Speaker 4:So you and that's that's an easy game. The the risk piece is easy, but, ultimately, anybody who's grossing over a million dollars and paying over $50,000 in taxes, we can determine what risk that we should put together put in place to protect those you know, which policy we should put in place to protect those policy. Kind of
Speaker 2:the the the entry question, and and I'll be the the dummy to ask this one. So when you do write those policies, what are I I and, like, say, for example, I've I've been in marketing for very long, so I completely understand branding risk, a lot of IP, pretty much everything around that. So what are what are some as specific as you'd like to get Sure. Of that that you that you write those policies for?
Speaker 4:Well, COVID's made my life really easy. Okay? Because now everybody understands the types of risks that we're talking about. Right? Brand risk, yeah, that's that's pretty obvious to to understand.
Speaker 4:Another one that's very now everyone understands is what we call contingent business interruption risk. Wait. The government can ship my restaurant now? Well, actually, yes, they can. Yeah.
Speaker 4:You know, predict yourself. Right? So so contingent business interruption risk. Another one, supply chain interruption policies. Right?
Speaker 4:Everyone now understands what the supply chain risk is. Right? So can you buy insurance from Allstate that says, hey. I want a supply chain interruption policy? No.
Speaker 4:Do you have supply chain risk? If you manufacture anything or have any cost of goods or anything else, yes. You have supply chain risk. Dispute resolution. If you get sued, we all have the risk of being sued.
Speaker 4:Can you buy an insurance policy on the open market for locked in insurance? No. So those are the types of coverages. We typically look at a business, and you'll have seven or eight different insurance policies that make sense for your type of business. Not everyone's gonna qualify for the foodborne illness policy.
Speaker 4:I have no risk of foodborne illness. My break room's well well taken care of. It's clean. There's no you know, it's clean. I don't know how how your guys' is, but mine looks good, so I don't have any risk of foodborne illness.
Speaker 4:Does a restaurant have a risk of foodborne illness? Absolutely. So those are the types of policies. Again, probably, we have about 13 or 14 different options that will look at a business and underwrite the business to make sure that the policies we're writing make sense for that type of business.
Speaker 2:So these so if I'm hearing that right, so these really are supplemental policies. They're not intended to replace, say, a BOP?
Speaker 4:Or That's a that's a excellent question. Thank you for asking that. Typically, we're not replacing their current p and c policies. If you have coverage to protect your business, you're gonna maintain those policies. Those are gonna going to continue.
Speaker 4:What we're talking about is adding new lines of coverage to protect your business from otherwise uninsured or underinsured risks. Right? Data breach is a vote. There's one that we offer a data breach policy. Most bought policies have some sort of data breach.
Speaker 4:There's lots of limitations and lots of exclusions, but we can fund to protect data breach. You know? Chris has a huge data breach risk. Right? If he handles his computer, he's gonna have a lot of people coming down as, coming on top of him, hey.
Speaker 4:Where you lost my data. I'm gonna sue you. Right? So that's a real risk that that that Chris has as CPA. And so But and so for for this strategy, assuming a business fits your criteria, I have a two part question.
Speaker 4:Is this is this a strategy that you've that most of your clients and, again, I know we have mutual clients, but let's assume we didn't. Is this a strategy most clients do one time, or is it something that they just put into their overall business plan on an annual basis and are able to take advantage of this opportunity? And then what are the three top industries that are great fits for this type of, I know there are a lot of them. Right? Because we we we we're real real estate heavy in our practice.
Speaker 4:But what are some of the the top three type of industries that you find yourself working with? Well, the so great question. As far as the type of businesses, there really isn't a specific type of business. Right? We do have a specific dental warranty protection program.
Speaker 4:So if a dentist is an absolute slam dunk and that anybody in the dental and dental world. But, really, anyone else who has again, there's not really a specific. So I have all of, you know, real estate from manufacturers, retail, pretty much anyone who has a successful business has the same types of risks. So to answer that question, I really don't have a specific type of a business that makes the most sense, other than the dental world is is probably the the number one most efficacious, to use a fancy word Mhmm. More
Speaker 2:than eight thirty one b.
Speaker 4:Us and is this something most businesses implement on an annual basis, or is it a is it one time event typically? Risk risk mitigation is a continual thing. You know, your risk doesn't just disappear from one year to the next. Your level of coverage may change from where you're because the policies that we write are one year insurance policies. They'll start the month you start the program.
Speaker 4:They'll go for twelve months. Once that twelve months is over, that premium that you paid is going to then become earned premium to your insurance company. And the following year, you'll decide, hey. I wanna buy the same amount of coverage. I may lower my limits.
Speaker 4:I may need to increase my limits. And, again, we'll talk for the with the business owner each year on what their limits of liability, what their coverages should look like to determine how much premium to put in each year. And that's something that we talk about with with people that you'll take advantage of this strategy is and one of the things we teach in teaching tax flows, your marginal tax rate's completely different than your tax bracket. And just changing the character of how you're taxed is is is a big tool that you can use that most people have no idea about. So, not again, you know, we're we're so lucky to even have Roger on this podcast.
Speaker 4:He's going to be a he's a content contributor in teaching tax flow on a couple of mini lessons. So I would encourage you to to take those mini lessons. But one of the great advantages of the primary insurance program is that when you recognize the income as taxable, a lot of times it's at a lower rate, not to get into the weeds too much, as your business income. So to be able to to to be taxed at a lower marginal tax rate than you're getting the tax benefit from, when you when you fund those insurance policies, there's a
Speaker 2:huge advantage. And to back that up, Chris, it's always interesting, you know, a lot of the conversations we have with, excuse me, with individuals and and companies and organizations and and even some some higher higher up individuals, I should say, in some organizations, is that they never even realized that there's options like this that not only carry huge benefit to really mitigating risk, but the tax advantages really are out of this world. Like and it's something that's just not known widely, so it's it's incredible.
Speaker 4:Well, the the and the other thing is a lot of times as a CPA and and a lot of times, business owners and or or coming to us and saying, what can I do? And what can I do? And many of the strategies are really hard to qualify for. Maybe they're real complicated because you have to form, put yourself on a payroll or you have to maybe meet some type of health insure health requirement where this, as Roger said, you know, some of the risks that are out there are pretty common, that most business owners do, you know, incur. So and, actually, so a question
Speaker 2:for you too, Roger. So thinking of, say a say a smaller business, say it's, you know, has eight eight and a half employees, you know, say you have a dog who's assets on and thinks it's on the payroll, but it's not, you know, you feed it under your desk. Say they do a couple mil in annual revenue. They they wanna pursue something like this. It sounds more complicated than it may be initially, but as far as for the the implementation of the setup of that and and getting that policy underwritten, I mean, are there any estimated time it's kind of a loaded question a little bit, but estimated time frames.
Speaker 2:Is it similar to that process of going to an agent that they may have in place already as far as for effort on their end to set this up? Yeah. It's it's actually a really simple process. I mean, guys,
Speaker 4:when you love what you do, you make things as easy as you can for your clients. But, ultimately, the client's gonna call me and say, hey. Here's my situation. I'm gonna ask them what their gross revenue are revenues are. Well, I'll explain forty five minutes, go through the presentation, make sure they understand what it is, why they can get a deduction for mitigating their risk.
Speaker 4:And I am very protective because I want to make sure that the business owners understand this is a risk mitigation strategy with tax benefits. If we ever do anything solely to avoid paying taxes, the IRS has a name for that. It's called tax evasion. They have a place for that. It's called jail.
Speaker 4:And, Chris is way too pretty to go to jail. I know you guys can't see, but I sure can. So Yeah. I don't look good in stripes. You'd you'd
Speaker 2:be in trouble, and I hear I hear the phone was not all that good. So
Speaker 4:Well, we we make sure that the client understands, but their their level of involvement or their their increase in workload is really quite nominal for the amount of benefit they're getting. We do all of that as the insurance manager. We make sure that everything's done appropriately and done, you know, as efficiently as possible. Sure. You have to create your reinsurance company.
Speaker 4:We we do all of it for you, but it's really not for the bank for your buck. It's really not that much extra work, and we understand how it works. It's it's and the renewal process is very simple. So So business owner if you're a business owner and you're you're you're you look on your tax return and you're paying 50,000 or really hundred thousand dollars or more of actual tax, this is something you should deeply consider, and please let us know. We will make Roger, we're gonna we're gonna let, let the listeners know how they're gonna how they can get a hold of you.
Speaker 4:But before we wrap things up, we have a, a segment that I like to call special guest rapid fire. So I'm gonna hit you with a few different fun oddball questions just to, just to get your answer. And I and I did I tell a lot of the special guests. I stole this from a good friend of mine's podcast. So are you ready?
Speaker 4:And we didn't tell you about this beforehand, by the way. Because I really did. So this this will be fun. Let's see it. Bring it.
Speaker 4:Alright. First question. Dog person or cat person? Dog. Alright.
Speaker 4:Favorite hobby? Snowmobiling. Favorite cereal? Old Gramps. Oh, oh, me too.
Speaker 4:Alright. That's cool. I didn't see that one coming. Okay. And they're just anyway, just don't get them let them get too soggy.
Speaker 4:Yeah. Your hero. Oh, my father. Great. And then last question, ideal weekend?
Speaker 4:Just got back from Cabo. It was great. So How's it get better than that? Well, I I I have way too many things I like to do, but either snowmobiling or or at the beach, I'm I'm I'm game for either. So it's good.
Speaker 2:Clearly, you like polar opposites. Right? Because I don't think they ever
Speaker 4:had any, sleds in in Cabo. No. Really don't. But, it's a good it was a good break. I had a lot of snowmobiling the week before that, so we're good.
Speaker 4:Nice. Yeah. He exactly. Roger's based in the mountains, and, gets to gets to get out out in that and then the fresh snow a lot, hopefully. We'd say after November and December after that, then I could play.
Speaker 4:So And that's something a good point is what we find in with tax planning is just overall tax planning. Don't wait until the fourth quarter to think about this. And, you know, obviously, a lot of the, the calculations and the the cash flow versus tax flow determinations are made based on your income. But especially if you're in an if you have a SaaS business or you're have a consistent revenue and you really can predict your revenue for the year, start getting involved in looking at this proper this this strategy earlier in the year. Don't wait till November and, you know, like, some people do, and I shoehorned some clients in with Roger then, but that's not really what you wanna do.
Speaker 4:So, and that's that's a great point, Chris, because ultimately, there is there is a benefit to starting earlier. And when we talk through it with the client, we'll we'll teach you why that's important. It's about the timing of the earning of the premium. So there is definitely a benefit to starting earlier in the year. Yes.
Speaker 4:We all a lot of us don't know how much money we're gonna make till the end of the year, and I get it. That's why my family hates me in November and December because I'm not all working, you know, twenty four seven. But the ultimate of the sooner we can get started, the better, and there's there's reasons for that. So
Speaker 2:And that actually kinda leads me into one of my favorite things that we always talk about is our board of directors and just tying everybody in together. And, Roger, really, everything I've taken from this and, I mean, again, in full transparency, I didn't know a ton about this until we talked a little bit earlier and then on this this show, so this is great. You know, obviously, you're you're a significant part of any business. Like, once you get involved, you're you you can probably go in and help them identify risks that they didn't even know they had. And then this opportunity, which then helps, obviously, on the tax side, which then obviously elevates the business to new level.
Speaker 2:So it's there's so many points of wanting to do something like this. It's it's fantastic. So I've been
Speaker 4:I've been offered the controller job of queue times over over over my career. I can imagine. So It's not yet, but this is a this is fun, and you're really making an impact on people. I can tell you firsthand. Well, we are so like I said, really appreciate you being on the show.
Speaker 4:Most it's really hard to get access to someone like a Roger. Again, he's we've got content from him in teaching tax flow. Roger, what's the best way for someone to get a hold of you if they're interested in determining if private reinsurance program if that if that program makes sense for them? Well, let's let's have a quick conversation, talk about your business, who's involved, what the gross revenues are. So I I I actually live and die on my calendar link, so I'm sure you guys will put that up on this on this link.
Speaker 4:If you just go to my you can book me and and find a time to do even a quick intro just to understand, you know, we'll we'll talk. You know? No obligation. I don't charge a tax consulting fee or tax planning I just wanna help as many people as I possibly can and make sure that it's an appropriate strategy, and it makes sense for a business owner to save money to save money in taxes instead of spending money to save money in taxes. We all know what that means, and, that's why I love what I do is is just get a hold of me either via email or my YouTube book, me, book a time in
Speaker 2:my calendar. We'll just go through it. So Excellent. Excellent. Well, thank you again, Roger.
Speaker 2:And as always, thank you everybody for joining us on the show. And before I say, we'll see you next week, we did wanna give another thank you to Repstracker for for sponsoring and supporting this podcast episode. Again, we will drop the unique URL and the code in our show notes as well as Roger two will also have some information, that we'll pass along to our listeners too if they would like to
Speaker 4:get ahold of you. So thank you again, and and, I mean, the info was invaluable. So And we will see you guys in the defeating taxes private Facebook group. Come hang out and learn some more. And behave yourself in there, Trey.
Speaker 4:I'll call it tight.
Speaker 2:Alright. Thank you again, everybody, and we will see you next week. Thank you everybody for joining in once again on Teaching Taxful, the podcast. Thank you, Chris, as always, for co hosting this with me, and thank you for Roger for joining us and really giving us a ton of that information on that private reinsurance program, eight thirty one b. Those of you listening, if you do wanna reach out to Roger, we definitely welcome that.
Speaker 2:Link is in the show notes. Also, some of the contacts that Roger had mentioned just previously. Great way to get a hold of him, to kinda echo what he said. He's really out there to help people just like our team here at teaching tax law. Take advantage of that.
Speaker 2:Don't sit around and wonder, oh, I I wonder if that's maybe for me or I have a question. Definitely reach out to him. We always can we always welcome that. Great guy. Great guy.
Speaker 2:He's not the type of person that's gonna kinda talk you into a corner a little bit or try to really sell you something. He is really full of information and loves sharing it, obviously. And we're speaking, obviously, from our experience with him and and that that we've heard from others. So definitely do that. Again, as Chris always mentions too or or I had mentioned, reach out to anybody.
Speaker 2:Anybody in the teaching taskful community on our defeating taxes private Facebook group, you can go to defeatingtaxes.com. Or if you're on Facebook, just search defeatingtaxes. Should pop right up. You see a cool little image up top there with a kid with some boxing gloves on, ready to take on the tax man. So, if you are already a member, don't even really have a search for it, should already be there in the toolbar.
Speaker 2:Get on there. Ask those questions. Start a new conversations, Whether you're a real estate investor, entrepreneur, individual, any of those things, reach out. It's there for you. So thank you as always, and we look forward to our next show.
